Chapter 9, Problem 4PB

To determine

Prepare journal entries in the books of F Delivery.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare journal entry for the transaction occurred on January 2, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
January	2	Building			175,000
			Cash			175,000
		(To record the purchase of building)

Table (1)

Description:

• Building is an asset and it is increased by $175,000. Therefore, debit building account with $175,000.
• Cash is an asset and it is decreased by $175,000. Therefore, credit the cash account with $175,000.

Prepare journal entry for the transaction occurred on July 1, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
July	1	Equipment			40,000
			Cash			40,000
		(To record purchase of equipment)

Table (2)

Description:

• Equipment is an asset and it is increased by $40,000. Therefore, debit equipment account with $40,000.
• Cash is an asset and it is decreased by $40,000. Therefore, credit the cash account with $40,000.

Prepare journal entry for the transaction occurred on October 13, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
October	13	Repairs and Maintenance Expense			500
			Cash			500
		(To record the payment of expense)

Table (3)

Description:

• Repair expense is an expense account and it is increased by $500. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit repair expenses account with $500.
• Cash is an asset and it is decreased by $500. Therefore, credit the cash account with $500.

Prepare journal entry for the transaction occurred on October 13, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
October	13	Repairs and Maintenance Expense			150
			Cash			150
		(To record payment of expense)

Table (4)

Description:

• Repair expense is an expense account and it is increased by $150. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit repair expenses account with $150.
• Cash is an asset and it is decreased by $150. Therefore, credit the cash account with $150.

Prepare journal entry for the transaction occurred on December 1, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
December	1	Franchise Rights			90,000
			Cash			90,000
		(To record purchase of franchise rights)

Table (5)

Description:

• Franchise Rights is an asset and it is increased by $90,000. Therefore, debit the franchise rights account with $90,000.
• Cash is an asset and it is decreased by $90,000. Therefore, credit the cash account with $90,000.

Prepare journal entry for the depreciation expense and amortization expense as on December 31, 2018.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2018
December	31	Depreciation Expense–Building (1)			17,500
		Depreciation Expense–Equipment (2)			3,200
		Amortization Expense (3)			1,500
			Accumulated Depreciation–Building			17,500
			Accumulated Depreciation–Equipment			3,200
			Accumulated Amortization			1,500
		(To record depreciation expense and amortization expense)

Table (6)

Description:

• Depreciation expense is an expense account and it is increased by $17,500. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit depreciation expenses account with $17,500.
• Depreciation expense is an expense account and it is increased by $3,200. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit depreciation expenses account with $3,200.
• Amortization expense is an expense account and it is increased by $1,500. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit amortization expenses account with $1,500.
• Accumulated depreciation–building is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated depreciation account with $17,500.
• Accumulated depreciation– equipment is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated depreciation account with $3,200.
• Accumulated amortization is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated amortization account with $1,500.

Working note (1):

Determine the depreciation expense for building under double-declining-balance method, if cost of building is $175,000, useful life is 20 years, and accumulated depreciation is $0.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\text{Depreciable cost}\text{×Depreciation rate}\\ \text{= }\left(\text{Cost – Accumulated depreciation}\right)\text{×}\frac{2}{\text{Useful life}}\\ =\left(\$175,000–\$0\right)\times \frac{2}{\text{20 years}}\\ =\$17,500\end{array}$

Working note (2):

Determine the depreciation expense for equipment for 6 months (July 1 to December 31) under straight-line method, if cost of equipment is $40,000, useful life is 5 years, and residual value is $8,000.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\text{Depreciable cost×Depreciation rate}\\ \text{= }\left(\text{Cost–Residual value}\right)\text{×}\frac{1}{\text{Useful life}}\times \text{Time period }\\ =\left(\$40,000–\$8,000\right)\times \frac{1}{\text{5 years}}\times \frac{6}{12}\\ =\$3,200\end{array}$

Working note (3):

Determine amortization expense for 1 month (from December 1 to December 31), if cost of franchise right is $90,000, and useful life is 5 years.

$\begin{array}{c}\text{Amortization expense =}\left\{\begin{array}{l}\text{Cost of intangible asset}\text{×}\\ \frac{\text{1}}{\text{Useful life}}\text{× Time period}\end{array}\right\}\\ \text{= \$90,000 × }\frac{\text{1}}{\text{5 years}}\times \frac{1}{12}\\ \text{= \$1,500}\end{array}$

Prepare journal entry for the depreciation expense as on June 30, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
June	30	Depreciation Expense–Building (4)			7,875
			Accumulated Depreciation–Building			7,875
		(To record the depreciation expense)

Table (7)

Description:

• Depreciation expense is an expense account and it is increased by $7,875. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit depreciation expenses account with $7,875.
• Amortization expense is an expense account and it is increased by $7,875. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit amortization expenses account with $7,875.

Working note (4):

Determine the depreciation expense for building for 6 months (December 31, 2018 to June 30, 2019) under straight-line method, if cost of building is $175,000, useful life is 20 years, and accumulated depreciation is $17,500.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\text{Depreciable cost × Depreciation rate}\\ \text{= }\left(\text{Cost – Accumulated depreciation}\right)\text{×}\frac{2}{\text{Useful life}}\\ =\left(\$175,000–\$17,500\right)\times \frac{2}{\text{20 years}}\times \frac{6}{12}\\ =\$7,875\end{array}$

Prepare journal entry for the sale of building on June 30, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
June	30	Cash			140,000
		Accumulated Depreciation–Building			25,375
		Loss on Disposal (6)			9,625
			Building			175,000
		(To record sale of building)

Table (8)

Description:

• Cash is an asset and it is increased by $140,000. Therefore, credit the cash account with $140,000.
• Accumulated depreciation– equipment is a contra-asset account and would have a normal credit balance. Since the equipment is sold, the accumulated depreciation balance is reversed to reduce the building account balance. Hence, the accumulated depreciation account is debited with $25,375.
• Loss on disposal is an expense account and it is increased by $9,625. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit depreciation expenses account with $9,625.
• Building is an asset and it is decreased by $175,000. Therefore, credit the equipment account with $175,000.

Working note (5):

Determine the gain on sale.

Compute book value on the date of sale.

$\begin{array}{c}\text{Book value = Cost–Accumulated depreciation}\\ \text{= \$175,000–}\left(\$17,500+\$7,875\right)\\ \text{= \$149,625}\end{array}$

Working note (6):

Compute gain (loss) on sale.

$\begin{array}{c}\text{Gain (Loss) = Sale proceeds – Book value}\\ \text{= \$140,000 – \$149,625 (5)}\\ \text{= }\left(\text{\$9,625}\right)\end{array}$

Prepare journal entry for the depreciation expense and amortization expense as on December 31, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
December	31	Depreciation Expense–Equipment			6,400
		Amortization Expense			18,000
			Accumulated Depreciation–Equipment			6,400
			Accumulated Amortization			18,000
		(To record depreciation expense and amortization expense)

Table (9)

Description:

• Depreciation expense is an expense account and it is increased by $6,400. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit depreciation expenses account with $6,400.
• Amortization expense is an expense account and it is increased by $18,000. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit amortization expenses account with $18,000.
• Accumulated depreciation– equipment is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated depreciation account with $6,400.
• Accumulated amortization is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated amortization account with $18,000.

Note: Refer to Table (6) for all the values.